nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒01‒23
37 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Assessing Central Bank Commitment to Inflation Targeting: Evidence from Financial Market Expectations in India By Vaishali Garga; Aeimit K. Lakdawala; Rajeswari Sengupta
  2. A Tale of Two Global Monetary Policies By Silvia Miranda-Agrippino; Tsvetelina Nenova
  3. International Spillovers of Tighter Monetary Policy By Dario Caldara; Francesco Ferrante; Albert Queraltó
  4. Time-varying credibility, anchoring and the Fed's inflation target By Diegel, Max
  5. Looking Beyond the Fed: Do Central Banks Cause Information Effects? By Christopher D. Cotton
  6. Money, e-money and consumer welfare By Carli, Francesco; Uras, Burak
  7. Social Capital and Monetary Policy By Rustam Jamilov
  8. Optimal Monetary Policy Rules in the Fiscal Theory of the Price Level By Boris Chafwehé; Charles de Beauffort; Rigas Oikonomou
  9. Optimal Monetary Policy with and without Debt By Boris Chafwehé; Rigas Oikonomou; Romanos Priftis; Lukas Vogel
  10. Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings By Mitali Das; Gita Gopinath; Taehoon Kim; Jeremy C. Stein
  11. The Burst of High Inflation in 2021–22: How and Why Did We Get Here? By Ricardo Reis
  12. How sensitive is the economy to large interest rate increases? Evidence from the taper tantrum By Nitish R. Sinha; Michael Smolyansky
  13. Testing the effectiveness of unconventional monetary policy in Japan and the United States By Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti
  14. Asset Bubbles and Inflation as Competing Monetary Phenomena By Guillaume Plantin
  15. Optimal Monetary Policy and Liquidity with Heterogeneous Households By Florin Bilbiie; Xavier Ragot
  16. Optimal Policy under Dollar Pricing By Konstantin Egorov; Dmitry Mukhin
  17. The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? By Guillaume Plantin; Eric Mengus; Jean Barthelemy
  18. The Impact of Post-GFC Monetary Policy in the US on Capital Flows to the SEACEN Economies By Juhro, Solikin M.; Anglingkusumo, Reza
  19. eNaira central bank digital currency (CBDC) for financial inclusion in Nigeria By Ozili, Peterson K
  20. CBDC, Fintech and cryptocurrency for financial Inclusion and financial stability By Ozili, Peterson K
  21. Information frictions in inflation expectations among five types of economic agents By Camille Cornand; Paul Hubert
  22. The Global Pandemic, Laboratory of the Cashless Economy? By Jeremy Srouji; Dominique Torre
  23. The Effects of Monetary Policy: Theory with Measured Expectations By Christopher Roth; Mirko Wiederholt; Johannes Wohlfart
  24. Monetary Policy and Racial Inequality By Alina K Bartscher; Moritz Kuhn; Moritz Schularick; Paul Wachtel
  25. Energy shocks in the Euro area: disentangling the pass-through from oil and gas prices to inflation By Chiara Casoli; Matteo Manera; Daniele Valenti
  26. Limited Energy Supply, Sunspots, and Monetary Policy By Nils Gornemann; Sebastian Hildebrand; Keith Kuester
  27. Understanding the food component of inflation By Emanuel Kohlscheen
  28. The Real Effects of Invoicing Exports in Dollars By Antoine Berthou; Guillaume Horny; Jean-Stéphane Mésonnier
  29. The Demand for Money at the Zero Interest Rate Bound By Tsutomu Watanabe; Tomoyoshi Yabu
  30. Capital Flows in an Aging World By Zsófia L. Bárány; Nicolas Coeurdacier; Stéphane Guibaud
  31. Estimating the Effects of Monetary Policy in Australia Using Sign-restricted Structural Vector Autoregressions By Matthew Read
  32. Leverage and Stablecoin Pegs By Gary B. Gorton; Elizabeth C. Klee; Chase P. Ross; Sharon Y. Ross; Alexandros P. Vardoulakis
  33. Rigid High Street, Flexible Wall Street By Roman Sustek
  34. Dominant Drivers of National Inflation By Jan Ditzen; Francesco Ravazzolo
  35. Asia's push for monetary alternatives By Noland, Marcus
  36. Non-Fundamental Flows and Foreign Exchange Rates By Felipe E. Aldunate; Zhi Da; Borja Larrain; Clemens Sialm
  37. The Micro and Macro Dynamics of Capital Flows By Felipe Saffie; Liliana Varela; Kei-Mu Yi

  1. By: Vaishali Garga; Aeimit K. Lakdawala; Rajeswari Sengupta
    Abstract: We propose a novel framework to gauge the credibility of central banks’ commitment to an inflation-targeting regime. Our framework combines survey data on macroeconomic forecasts with high-frequency financial market data to understand how inflation targeting makes economic agents change their perception about central bank decisions. Specifically, using the Reserve Bank of India’s adoption of inflation targeting in 2015 as a laboratory, we apply two different approaches to estimate a market-perceived monetary policy rule and analyze how it changed with the implementation of inflation targeting. Both approaches indicate that the market perceived a larger response to inflation in the monetary policy reaction function following the adoption of inflation targeting. This evidence suggests that the market viewed the shift to inflation targeting as a credible commitment by the Reserve Bank of India.
    Keywords: macroeconomic forecasts; financial markets; credibility; inflation targeting; inflation expectations
    JEL: E44 E47 E52 E58
    Date: 2022–10–01
  2. By: Silvia Miranda-Agrippino (Bank of England; Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR)); Tsvetelina Nenova (London Business School)
    Abstract: US monetary policy is not the only one with a global reach. We compare the international financial spillovers of the unconventional monetary policies of the Fed and the ECB. Monetary policy tightenings in both areas are followed by a global retrenchment in capital flows, a fall in global stock markets, and a rise in global risk measures. Thus, ECB and Fed monetary policies propagate internationally through equivalent transmission channels. ECB monetary policy shocks also affect significantly the US business and financial cycles. We produce tentative evidence that links the strength of the ECB international spillovers to the Euro exposure for both trade invoicing and the pricing of financial transactions.
    Keywords: Monetary Policy, Global Financial Cycle, International spillovers, Currency Pricing Paradigm, Fed, ECB
    JEL: F42 E52 G15
    Date: 2021–08
  3. By: Dario Caldara; Francesco Ferrante; Albert Queraltó
    Abstract: Central banks around the world are tightening monetary policy in response to a global surge in inflation not seen since the 1970s. This synchronization of global interest rate hikes and further increases expected by markets, illustrated in figure 1, have raised concerns about adverse international spillovers of tighter monetary policy.
    Date: 2022–12–22
  4. By: Diegel, Max
    Abstract: This paper analyzes the time-varying credibility of the Fed's inflation target in an empirical macro model with asymmetric information, where the public has to learn about the actual inflation target from the Fed's interest rate policy. To capture the evolving communication strategy of the Fed, I allow the learning rule and the structural shock variances to change across monetary policy regimes. I find that imperfect credibility is pronounced during the Volcker Disinflation and to a lesser extend in the aftermath of the 2008 Financial Crisis. The announcement of the 2% target in 2012 did not affect the learning rule strongly but reduced the variance of transitory monetary policy shocks. The results caution against equating long-term inflation expectations of professionals with the perceived inflation target.
    Keywords: signal extraction problem, credibility, inflation target, unobserved components, VAR
    JEL: C11 C32 D83 D82 E31 E52
    Date: 2022
  5. By: Christopher D. Cotton
    Abstract: The importance of central bank information effects is the subject of an ongoing debate. Most work in this area focuses on the limited number of monetary policy events at the Federal Reserve. I assess the degree to which nine other central banks cause information effects. This analysis yields a much larger panel of primarily novel events. Following a surprise monetary tightening, economic forecasts improve in line with information effects. However, I find this outcome is driven by the predictability of monetary policy surprises and not information effects. My results support the view that central bank information effects may be overstated.
    Keywords: information effect; forecasts; monetary policy surprise; central bank
    JEL: E43 E52 E58
    Date: 2022–09–01
  6. By: Carli, Francesco; Uras, Burak
    Abstract: We develop a micro-founded monetary model to inquire the role of a privately provided e-money instrument for household consumption smoothing and welfare. Different from fiat money, e-money users pay electronic transaction fees, but in turn e-money reduces spatial separation frictions and enables risk-sharing. We characterize the conditions that promotes e-money to be Pareto improving and the conditions when e-money reduces its users' welfare - despite for the consumption-smoothing it induces. We calibrate our model for the context of M-Pesa in Kenya and conduct a quantitative analysis. Since our quantitative analysis reveals a limited role for privately provided e-money, we recommend the optimality of e-money regulation.
    Keywords: E-Money, M-Pesa, Risk-Sharing, Welfare, Monetary Policy
    JEL: E41 E44 G23 O11
    Date: 2022
  7. By: Rustam Jamilov (University of Oxford)
    Abstract: The U.S. have experienced a significant decline in generalized trust over the past three decades. Has this secular trend impacted central banking? Empirically, we document that states with high levels of institutional and interpersonal trust are robustly more responsive to monetary policy shocks. Theoretically, we embed a circle of trust block into the New Keynesian framework in continuous time. The calibrated model predicts that monetary policy has become 20% less effective due to the decline in trust. Our findings firm up the social capital channel of monetary non-neutrality and warn that crises of trust could lead to crises of policy inefficacy.
    Keywords: Monetary policy, trust, social capital
    JEL: E5 E7 Z1
    Date: 2022–11
  8. By: Boris Chafwehé (European Commission (Joint Research Center) and IRES (UCLouvain)); Charles de Beauffort (National Bank of Belgium); Rigas Oikonomou (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: In the fiscal theory of the price level, inflation and debt dynamics are determined jointly. We derive optimal monetary policy rules that can approximate the Ramsey outcome in this environment. When the government issues a portfolio of bonds of different maturities and buys it back every period the optimal interest rate response to inflation is a simple, transparent function of the average debt maturity. This policy exploits the maturity structure to minimize the intertemporal variability of inflation in response to fiscal shocks. We then turn to the more realistic scenario of no buyback assuming that the government does not repurchase and reissue debt in every period. In the case where debt is only long term, the optimal policy equilibrium features oscillations in inflation and simple inflation targeting rules may lead to explosive inflation dynamics. Issuing both short and long bonds rules out oscillations and allows simple rules to approximate the Ramsey outcome closely. Underlying these results is the ability of the optimizing policy authority to smooth distortions stemming from inflation across periods. When debt is short term or it is bought back in every period, the planner can spread evenly the distortions over time. Under no repurchases, this ability is lost.
    Keywords: Monetary Policy, Fiscal Theory, Optimal Interest Rates, Government Debt Maturity, Ramsey policy
    JEL: E31 E52 E58 E62 C11
    Date: 2022–11–29
  9. By: Boris Chafwehé (European Commission (Joint Research Center) and IRES (UCLouvain)); Rigas Oikonomou (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Romanos Priftis (European Central Bank); Lukas Vogel (European Commission (ECFIN))
    Abstract: We derive optimal monetary policy rules when government debt may be a constraint for the monetary authority. We focus on an environment where fiscal policy is exogenous, setting taxes according to a rule that specifies the tax rate as a function of lagged debt. In the case where taxes do not adjust sufficiently to ensure the solvency of debt, then the monetary authority is burdened by debt sustainability. Under this scenario, optimal monetary policy is a ‘passive money rule’, setting the interest rate to weakly respond to inflation. We characterize analytically the optimal inflation coefficients under alternative specifications of the central bank loss function, using a simple Fisherian model, but also the canonical New Keynesian model. We show that the maturity structure of debt is a key variable behind optimal policy. When debt maturity is calibrated to US data, our model predicts that a simple inflation targeting rule where the inflation coefficient is 1 − 1 Maturity is a good approximation of the optimal policy. Lastly, our framework can also nest the case where fiscal policy adjusts taxes to satisfy the intertemporal debt constraint. In this scenario optimal monetary policy is an active policy rule. We contrast the properties of active and passive policies, using the analytical optimal policy rules derived from this framework of monetary/fiscal interactions.
    Keywords: Fiscal/monetary policy interactions, Fiscal theory of the price level, Ramsey policy
    JEL: E31 E52 E58 E62 C11
    Date: 2022–12–08
  10. By: Mitali Das; Gita Gopinath; Taehoon Kim; Jeremy C. Stein
    Abstract: This paper explores how non-U.S. central banks behave when firms in their economies engage in currency mismatch, borrowing more heavily in dollars than justified by their operating exposures. We begin by documenting that, in a panel of 53 countries, central bank holdings of dollar reserves are significantly correlated with the dollar-denominated bank borrowing of their non-financial corporate sectors, controlling for a number of known covariates of reserve accumulation. We then build a model in which the central bank can deal with private-sector mismatch, and the associated risk of a domestic financial crisis, in two ways: (i) by imposing ex ante financial regulations such as bank capital requirements; or (ii) by building a stockpile of dollar reserves that allow it to serve as an ex post dollar lender of last resort. The model highlights a novel externality: individual central banks may tend to over-accumulate dollar reserves, relative to what a global planner would choose. This is because individual central banks do not internalize that their hoarding of reserves exacerbates a global scarcity of dollar-denominated safe assets, which lowers dollar interest rates and encourages firms to increase the currency mismatch of their liabilities. Relative to the decentralized outcome, a global planner may prefer stricter financial regulation (e.g., higher bank capital requirements) and reduced holdings of dollar reserves.
    JEL: E42 F4 G15
    Date: 2022–12
  11. By: Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: The current institutional arrangements for monetary policy delivered more than two decades of low and stable inflation. Yet, central banks failed to prevent a burst of high inflation in 2021-22. This paper inspects four tentative hypotheses for why this happened. The first is a misdiagnosis of the nature of shocks during a time of great uncertainty leading to an overly long period of expansionary policy. The second is a neglect of expectations data driven by a strong belief that inflation expectations were firmly anchored and so inflation increases would be temporary. The third is an over-reliance on the credibility earned in the past, creating an illusion of too much room to focus on the recovery of real activity and underpredicting the resulting inflation. The fourth is a revision of strategy that made central banks tolerant of higher inflation because of the trend fall in the return on government bonds, even though the return on private capital stayed high.
    Date: 2022–06
  12. By: Nitish R. Sinha; Michael Smolyansky
    Abstract: The “taper tantrum” of 2013 represents one of the largest monetary policy shocks since the 1980s. During this episode, long-term interest rates spiked 100 basis points—a move unintentionally induced by policymakers. However, this had no observable negative effect on the overall U.S. economy. Output, employment, and other important variables, all performed either in line with or better than consensus forecasts, often improving considerably relative to their earlier trends. We conclude that, from low levels, a 100 basis point increase in long-term interest rates is probably too small to affect overall economic activity and discuss the implications for monetary policy.
    Keywords: monetary policy; federal reserve; taper tantrum; quantitative easing
    JEL: E43 E44 E52 E58
    Date: 2022–12
  13. By: Daisuke Ikeda (Bank of Japan); Shangshang Li (University of Oxford); Sophocles Mavroeidis (University of Oxford; Institute for New Economic Thinking (INET)); Francesco Zanetti (University of Oxford)
    Abstract: Unconventional monetary policy (UMP) may make the effective lower bound (ELB) on the short-term interest rate irrelevant. We develop a theoretical model that underpins our empirical test of this ‘irrelevance hypothesis, ’ based on the simple idea that under the hypothesis, the short rate can be excluded in any empirical model that accounts for alternative measures of monetary policy. We test the hypothesis for Japan and the United States using a structural vector autoregressive model with the ELB. We firmly reject the hypothesis but find that UMP has had strong delayed effects.
    Keywords: Effective lower bound, unconventional monetary policy, structural VAR
    JEL: E52 E58
    Date: 2022–10
  14. By: Guillaume Plantin (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Abstract. In a model with multiple price-setting equilibria with varying price rigidity a` la Ball and Romer (1991), a central bank using a Taylor rule may inadvertly create asset bubbles instead of reaching its inflation target regardless of the value of the natural rate. These monetary bubbles differ from natural ones in three important ways: i) They do not push up the interest rate no matter their size and thus earn low returns themselves; ii) They burst when inflation picks up; iii) They always crowd out investment by draining resources from the most financially constrained agents.
    Date: 2021–10–23
  15. By: Florin Bilbiie (UNIL - Université de Lausanne = University of Lausanne, CEPR - Center for Economic Policy Research - CEPR); Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: A liquidity-insurance motive for monetary policy operates when heterogeneous households use government-provided liquidity ("money") to insure idiosyncratic risk. In our tractable sticky-price model this changes the central bank's trade-off by adding a linear benefit of insurance in the second-order approximation to aggregate welfare. Inflation volatility hinders the consumption volatility of constrained households as a side-effect of liquidity-insuring them; but price stability has quantitatively significant welfare costs only when monopolistic rents are also large, which indicates a complementarity between imperfect-insurance and New-Keynesian distortions. Helicopter drops are welfare-superior to open-market operations to achieve insurance, but quantitatively their benefit is surprisingly small.
    Keywords: Optimal (Ramsey) Monetary Policy, Heterogeneous Households, Incomplete Markets, Money, Inequality, Helicopter Drops
    Date: 2021–07
  16. By: Konstantin Egorov (New Economic School (NES)); Dmitry Mukhin (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model, allowing for an arbitrary structure of asset markets, general preferences and technologies, time- or state-dependent price setting, and a rich set of shocks. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting remains robustly optimal in non-U.S. economies. The implementation of this non-cooperative policy results in a “global monetary cycle” with other countries importing the monetary stance of the U.S. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. Thanks to the dominance of the dollar, the U.S. can extract rents in international goods and asset markets and enjoy a higher welfare than other economies. Although international cooperation benefits other countries by improving global demand for dollar-invoiced goods, it is not in the self-interest of the U.S. and may be hard to sustain.
    Date: 2021–10
  17. By: Guillaume Plantin (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Eric Mengus (HEC Paris - Ecole des Hautes Etudes Commerciales); Jean Barthelemy (Centre de recherche de la Banque de France - Banque de France)
    Abstract: This paper studies a model in which the price level is the outcome of dynamic strategic interactions between a fiscal authority, a monetary authority, and investors in government bonds and reserves. The "unpleasant monetarist arithmetic", whereby aggressive fiscal expansion forces the monetary authority to chicken out and to lose control of inflation, occurs only if the public sector lacks fiscal space, in the sense that public debt along the optimal fiscal path gets sufficiently close to the threshold above which the fiscal authority would find default optimal. Otherwise, monetary dominance prevails even though the central bank has neither commitment power nor fiscal backing.
    Date: 2022–06–25
  18. By: Juhro, Solikin M.; Anglingkusumo, Reza
    Abstract: This paper examines the impact of unconventional monetary policy (UMP) in the US after the global financial crisis (GFC), represented by the expansion and contraction of the US Federal Reserve balance sheet, on capital inflows to SEACEN economies. The empirical results from panel data analysis of nine countries, namely Hong Kong SAR, India, Indonesia, Malaysia, Philippines, Singapore, Thailand, People Republic of China, and the Republic of Korea, since 2004 to 2018 point to the importance of portfolio inflows in transmitting the spill-over effects of the UMP / QE in core AEs, particularly in the US, on the SEACEN economies in the sample. The findings imply that SEACEN’s real economy and financial system are prone to elevated risks that accompany global portfolio rebalancing, thus lead to a strong merit in strengthening the cooperation framework within SEACEN, as a platform for regional sharing of policy experiences in dealing with capital flow volatility.
    Keywords: Capital inflows; unconventional monetary policy; monetary policy trilemma
    JEL: E58
    Date: 2021
  19. By: Ozili, Peterson K
    Abstract: There is much interest in central bank digital currency (CBDC) among central banks around the world. African countries have also joined the league of nations that are conducting research into CBDC. The launch of the eNaira CBDC in Nigeria has drawn substantial interest from observers around the world including central banks. The eNaira CBDC is envisaged to bring many benefits, and financial inclusion is considered to be one of such benefits. This paper explores the eNaira CBDC and its potential to increase financial inclusion in Nigeria. I show that the eNaira CBDC can increase financial inclusion by (i) offering an easy account opening process for greater financial inclusion (ii) enabling digital access to diverse financial services in the financial system, (iii) offering low-cost financial products and services, (iv) avoiding unexplained bank charges that causes financial exclusion, (v) attracting people who have lost confidence in banks, (vi) introducing interest-bearing eNaira, and (vii) using offline channels to access the eNaira.
    Keywords: Nigeria, eNaira, central bank digital currency, CBDC, financial inclusion, eNaira wallet.
    JEL: E50 E52 E58 G21
    Date: 2023
  20. By: Ozili, Peterson K
    Abstract: This article presents a discussion of the role of central bank digital currency (CBDC), Fintech and cryptocurrency for financial inclusion and financial stability. We show that Fintech, CBDC and cryptocurrency can increase financial inclusion by providing an alternative channel through which unbanked adults can access formal financial services. CBDC and Fintech services have the potential to preserve financial stability while cryptocurrency presents financial stability risks that can be mitigated through effective regulation. The paper also identified some problems of CBDC, Fintech and cryptocurrency for financial inclusion and financial stability. The paper offered some insight about the future of financial inclusion and the future of financial stability. Although CBDC, Fintech or cryptocurrency can extend financial services to unbanked adults and offer cost-efficient advantages, there are risk considerations that need to be taken into account when using CBDC, Fintech and cryptocurrency to increase financial inclusion and to preserve financial stability.
    Keywords: CBDC, Fintech, cryptocurrency, financial inclusion, financial stability, blockchain, central bank digital currency.
    JEL: E40 E51 E58 E59 G21 O31
    Date: 2023
  21. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Paul Hubert (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: We compare disagreement in expectations and the frequency of forecast revisions among five categories of agents: households, firms, professional forecasters, policymakers and participants to laboratory experiments. We provide evidence of disagreement among all categories of agents. There is however a strong heterogeneity across categories: while policymakers and professional forecasters exhibit low disagreement, firms and households show strong disagreement. This translates into a heterogeneous frequency of forecast revision across categories of agents, with policymakers revising more frequently their forecasts than firms and professional forecasters. Households last revise less frequently. We are also able to explore the external validity of experimental expectations.
    Keywords: inflation expectations, information frictions, disagreement, forecast revisions, experimental forecasts, survey forecasts, central bank forecasts
    Date: 2021–09–22
  22. By: Jeremy Srouji (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur, ISS - International Institute of Social Studies (ISS), Erasmus University Rotterdam); Dominique Torre (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur)
    Abstract: The COVID-19 pandemic has had a profound impact on payment systems and preferences around the world, reducing the use of cash in favor of digital payment instruments and accelerating the discussion around the need for a central bank digital currency. This article presents the digital payments and cashless agenda before and after the pandemic, focusing on how the changing payments landscape has influenced the priorities and decisions of regulators, banks and other financial intermediaries, with regards to the future shape of payment systems. It finds that while the pandemic demonstrated the benefits associated with building an advanced, competitive and integrated digital payments ecosystem , it has also brought to the forefront more fragmentation than convergence between payment systems in different regions of the world.
    Keywords: central bank digital currency (CBDC), digital payments, mobile money, cashless, payment systems, NFC, e-wallets
    Date: 2022–11–26
  23. By: Christopher Roth (University of Cologne); Mirko Wiederholt (LMU - Ludwig-Maximilians University [Munich], ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Johannes Wohlfart (CEBI - Center for Economic Behavior and Inequality - UCPH - University of Copenhagen = Københavns Universitet, UCPH - University of Copenhagen = Københavns Universitet)
    Abstract: We study the effects of monetary policy on aggregate consumption with a general equilibrium model but without making assumptions about expectation formation. The key idea is to express consumption of non-hand-to-mouth households as a function of expectations only and to elicit all expectations appearing in the consumption functions for alternative policy scenarios with a tailored survey. We illustrate this approach by computing aggregate consumption for alternative policies before the March 2021 and March 2022 FOMC meetings. We find that a modest forward guidance statement in the March 2021 FOMC meeting would have reduced aggregate consumption by 0.17% on impact and an interest rate hike of 50 basis points in the March 2022 FOMC meeting would have reduced aggregate consumption by 0.15% on impact.
    Keywords: Monetary Policy, Expectation Formation, Aggregate Consumption
    Date: 2022–07–21
  24. By: Alina K Bartscher (Danmarks Nationalbank); Moritz Kuhn (University of Bonn, CEPR - Center for Economic Policy Research - CEPR, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics); Moritz Schularick (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, University of Bonn, CEPR - Center for Economic Policy Research - CEPR); Paul Wachtel (NYU - NYU System)
    Abstract: This paper aims at an improved understanding of the relationship between monetary policy and racial inequality. We investigate the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between black and white households. Specifically, we show that, although a more accommodative monetary policy increases employment of black households more than for white households, the overall effects are small. At the same time, an accommodative monetary policy shock exacerbates the wealth difference between black and white households, because black households own fewer financial assets that appreciate in value. Over a fiveyear horizon, the employment effects remain substantially smaller than the countervailing portfolio effects.
    Keywords: Monetary policy,Racial inequality,Income distribution,Wealth distribution,Wealth effects
    Date: 2022
  25. By: Chiara Casoli (Fondazione Eni Enrico Mattei); Matteo Manera (Fondazione Eni Enrico Mattei and Department of Economics, Management and Statistics – DEMS, University of Milano-Bicocca); Daniele Valenti (Fondazione Eni Enrico Mattei and Department of Environmental Science and Policy – DESP, University of Milano)
    Abstract: We develop a Bayesian Structural VAR (SVAR) model to study the relationship between different kinds of energy shocks and inflation dynamics in Europe. Specifically, we include in our specification two separate energy markets (oil and natural gas) and two target macroeconomic variables, measuring inflation expectations and the realized headline inflation. Our results demonstrate that, during the last year, inflation in the Euro area is more affected from energy price shocks, particularly those coming from the natural gas sector. The high peaks of the Eurozone inflation are mainly associated with gas consumption demand shocks and, to a lesser extent, to oil and gas supply shocks.
    Keywords: Energy shocks, Oil and gas markets, Inflation, Bayesian Structural VARs
    JEL: C11 E31 Q41 Q43
    Date: 2022–12
  26. By: Nils Gornemann (Board of Governors of the Federal Reserve System); Sebastian Hildebrand (University of Bonn); Keith Kuester (University of Bonn)
    Abstract: A common assumption in macroeconomics is that energy prices are determined in a world-wide, rather frictionless market. This no longer seems an adequate description for the situation that much of Europe currently faces. Rather, one reading is that shortages exist in the quantity of energy available. Such limits to the supply of energy mean that the local price of energy is affected by domestic economic activity. In a simple open-economy New Keynesian setting, the paper shows conditions under which energy shortages can raise the risk of self-fulfilling fluctuations. A firmer focus of the central bank on input prices (or on headline consumer prices) removes such risks.
    Keywords: Energy crisis, macroeconomic instability, sunspots, monetary policy, heterogeneous households
    JEL: E31 E32 E52 F41 Q43
    Date: 2022–12
  27. By: Emanuel Kohlscheen
    Abstract: This article presents evidence based on a panel of 35 countries over the past 30 years that the Phillips curve relation holds for food inflation. That is, broader economic overheating does push up the food component of the CPI in a systematic way. Further, general inflation expectations from professional forecasters clearly impact food price inflation. The analysis also quantifies the extent to which higher food production and imports, or lower food exports, reduce food inflation. Importantly, the link between domestic and global food prices is typically weak, with passthroughs within a year ranging from 0.07 to 0.16, after exchange rate variations are taken into account.
    Date: 2022–12
  28. By: Antoine Berthou (Centre de recherche de la Banque de France - Banque de France, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Guillaume Horny (Centre de recherche de la Banque de France - Banque de France); Jean-Stéphane Mésonnier (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Centre de recherche de la Banque de France - Banque de France)
    Abstract: Exporting firms face foreign exchange risk when the export contract is invoiced in a foreign currency. For instance, for firms located outside of the United States, the US dollar is often used as a vehicle currency. The cost of hedging against this risk represents an additional trade cost for exporters, which is specific to the targeted destination. In this paper, we exploit an episode of heightened tensions in the USD/EUR foreign exchange market in July 2011, which increased the cost of hedging against US dollar fluctuations for French exporters. Using disaggregated information on bank balance sheets, bank-firm relationships and individual export flows for France, we show that exporters with a higher propensity to use hedging instruments reduced more their exports to "US dollar destinations" after this shock. For the average "treated" individual export flow in our sample, the increased hedging cost is equivalent to a counterfactual rise in trade costs by about 3 percentage points.
    Keywords: Dollar invoicing, Trade finance, Firm-level exports
    Date: 2022–03
  29. By: Tsutomu Watanabe (Graduate School of Economics, University of Tokyo); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University)
    Abstract: This paper undertakes both a narrow and wide replication of the estimation of a money demand function conducted by Ireland (American Economic Review, 2009). Using US data from 1980 to 2013, we show that the substantial increase in the money-income ratio during the period of near-zero interest rates is captured well by the log-log specification but not by the semi-log specification, contrary to the result obtained by Ireland (2009). Our estimate of the interest elasticity of money demand over the 1980-2013 period is about one-tenth that of Lucas (2000), who used a log-log specification. Finally, neither specification satisfactorily fits post-2015 US data.
    Keywords: money demand function; cointegration; zero lower bound; welfare cost of inflation; log-log form; semi-log form
    JEL: C22 C52 E31 E41 E43 E52
    Date: 2022–12
  30. By: Zsófia L. Bárány (CEU - Central European University [Budapest, Hongrie], CEPR - Center for Economic Policy Research - CEPR); Nicolas Coeurdacier (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Stéphane Guibaud (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We investigate the importance of worldwide demographic evolutions in shaping capital flows across countries. Our lifecycle model incorporates crosscountry differences in fertility and longevity as well as differences in countries' ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers uphill capital flows from emerging to advanced economies, while country-specific demographic evolutions reallocate capital towards countries aging more slowly. Our quantitative multi-country overlapping generations model explains a large fraction of long-term capital flows across advanced and emerging countries.
    Keywords: Aging, Household Saving, International Capital Flows
    Date: 2022
  31. By: Matthew Read (Reserve Bank of Australia)
    Abstract: Existing estimates of the macroeconomic effects of Australian monetary policy tend to be based on strong, potentially contentious, assumptions. I estimate these effects under weaker assumptions. Specifically, I estimate a structural vector autoregression identified using a variety of sign restrictions, including restrictions on impulse responses to a monetary policy shock, the monetary policy reaction function, and the relationship between the monetary policy shock and a proxy for this shock. I use an approach to Bayesian inference that accounts for the problem of posterior sensitivity to the choice of prior that arises in this setting, which turns out to be important. Some sets of identifying restrictions are not particularly informative about the effects of monetary policy. However, combining the restrictions allows us to draw some useful inferences. There is robust evidence that an increase in the cash rate lowers output and consumer prices at horizons beyond a year or so. The results are consistent with the macroeconomic effects of a 100 basis point increase in the cash rate lying towards the upper end of the range of existing estimates.
    Keywords: impulse responses; monetary policy; proxies; robust Bayesian inference; sign restrictions
    JEL: C32 E52
    Date: 2022–12
  32. By: Gary B. Gorton; Elizabeth C. Klee; Chase P. Ross; Sharon Y. Ross; Alexandros P. Vardoulakis
    Abstract: Money is debt that circulates with no questions asked. Stablecoins are a new form of private money that circulate with many questions asked. We show how stablecoins can maintain a constant price even though they face run risk and pay no interest. Stablecoin holders are indirectly compensated for stablecoin run risk because they can lend the coins to levered traders. Levered traders are willing to pay a premium to borrow stablecoins when speculative demand is strong. Therefore, the stablecoin can support a $1 peg even with higher levels of run risk.
    JEL: G0 G1 G10
    Date: 2022–12
  33. By: Roman Sustek (Queen Mary University of London; Centre for Macroeconomics (CFM))
    Abstract: Many historical properties of the nominal yield curve, including its business cycle lead-lag dynamics, are accounted for by a parsimonious structural model. Only a persistent expected growth factor has a substantial price of risk. Time-varying term premia are driven by a volatility factor containing news about future output growth. This factor is welfare neutral with zero price of risk. Bond prices reflect mainly the desire of investors to hedge endogenous consumption-inflation risk, not intertemporal smoothing motives. The results are robust to empirical evidence that a large fraction of the population has effectively zero elasticity of intertemporal substitution.
    Keywords: Term structure of interest rates, business cycle, recursive preferences, stochastic volatility, monetary policy
    JEL: E32 E43 E52 G12
    Date: 2021–10
  34. By: Jan Ditzen; Francesco Ravazzolo
    Abstract: For western economies a long-forgotten phenomenon is on the horizon: rising inflation rates. We propose a novel approach christened D2ML to identify drivers of national inflation. D2ML combines machine learning for model selection with time dependent data and graphical models to estimate the inverse of the covariance matrix, which is then used to identify dominant drivers. Using a dataset of 33 countries, we find that the US inflation rate and oil prices are dominant drivers of national inflation rates. For a more general framework, we carry out Monte Carlo simulations to show that our estimator correctly identifies dominant drivers.
    Date: 2022–12
  35. By: Noland, Marcus
    Abstract: For the last quarter century, Asia has been seeking greater autonomy within the existing international monetary system. While the region has had the resources to go its own way, intraregional rivalries, and a reluctance to damage ties to the US and the International Monetary Fund, have put a damper on regional initiatives. Now the ascendency of China offers a path toward greater regional autonomy in monetary affairs. Asia, led by China, has been playing a two-track strategy pushing for greater influence within the existing global institutions, while developing its own parallel institutions such as the Chiang Mai Initiative Multilateralization, the Belt and Road Initiative, and the Asian Infrastructure Investment Bank. Use of the Chinese renminbi will likely grow as a trade invoicing currency but expanded use of the renminbi as a reserve currency is more uncertain. It is possible that the dollar-centered international financial system could evolve into a multipolar system with multiple currencies playing key roles.
    Keywords: international monetary system; Asia; China; renminbi
    JEL: F33 F53 N25
    Date: 2022–12–01
  36. By: Felipe E. Aldunate; Zhi Da; Borja Larrain; Clemens Sialm
    Abstract: Frequent, yet uninformed, fund flows in Chilean pension plans generate substantial trading in currency markets due to the high allocation to international securities. These non-fundamental flows have a significant impact on the Chilean peso, which is estimated to have a relatively low price elasticity of 0.81. Hedging by the banking sector propagates the price pressure to currency forward markets and results in violations of the covered interest rate parity. Using trading data and bank balance sheet data, we confirm that regulatory requirements and banks’ risk bearing constraints create limits of arbitrage.
    JEL: F31 F32 F33 G11 G15 G21 G23 G40 G51 H55
    Date: 2022–12
  37. By: Felipe Saffie (University of Virginia Darden); Liliana Varela (London School of Economics (LSE); Centre for Economic Policy Research (CEPR)); Kei-Mu Yi (Federal Reserve Bank of Dallas; University of Houston; National Bureau of Economic Research (NBER))
    Abstract: We study empirically and theoretically the effects of international capital flows on resource allocation. Using the universe of firms in Hungary, we show that financial openness triggers input-cost and consumption channels, with the latter dominant and reallocating resources toward high expenditure elasticity activities in the short-run. A multi-sector heterogeneous firm trade model replicates these dynamics. In the long-run, the model predicts that resources will shift towards manufacturing exports to service debt. Owing to endogenous terms of trade dynamics, countries face a trade-off between the speed of convergence and their long-run capital stock; thus, financial openness can lead to welfare losses.
    Keywords: firm dynamics, financial liberalization, reallocation, capital flows, welfare, non-homothetic preferences
    JEL: F15 F41 F43 F63
    Date: 2021–06

This nep-mon issue is ©2023 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.